Right now is the ideal time to get your financial house in order with an annual review.
- Why are annual insurance and financial reviews so important?
- What life events signal a need to change your financial decisions?
- What should you be thinking about when you review the past year – and plan the next?
The new year brings a sense of renewal and with it the urge to take a fresh look at ourselves–inside and out. A new year will also bring with it a new tax season, a time to gather paperwork and review the past year, an ideal time to think about finances.
An annual review of your finances is a necessity at this time of year, not just for tax purposes, but because finances are dynamic; needs and goals change, new savings, investment, and insurance products become available, family incomes increase, children are born, others are off to college, estates increase, jobs change.
Regular annual reviews provide a much–needed opportunity to be certain your past financial decisions are still moving you in the direction of your goals — and if not, to change them as soon as possible.
This year, as you resolve to make positive changes, work on improving your financial situation. Start by gathering and organizing your paperwork: life insurance policies and beneficiary designations, year–end statements from your retirement and investment plans, disability and long term care insurance policies, last year's tax return, your spending records, and other financial documents.
Next, plan to meet with your insurance agent, financial services representative, tax advisor, and/or your legal advisor to discuss the past year as well as your plans and goals for the coming year.
Here are some suggestions for preparing for these meetings in advance:
- List any changes in your work and/or personal life that took place in the last 12 months. These may include a job change (including retirement), the closing or opening a business, a new business partner, a new home, a new baby, marriage or divorce.
Has your spending changed? Have you taken on a sizable business or personal loan? Have you incurred new expenses that will recur or continue into the coming 12 months? List these new expenses too.
- List any changes in your work and/or personal life that will take place in the next 12 months. On the flip side, it's wise to consider the impact of planned or predictable changes that will take place in the coming year. These fall into the same categories: job changes, a new baby, new home, etc. Considering these events proactively will help you plan ahead and put any necessary changes in motion so that you're ready for these events when they happen.
Consider the impact of these changes. These types of work and/or personal life changes often signal the need to:
- Change/add beneficiaries on your life insurance and/or other plans
- Purchase additional life insurance
- Investigate disability or long term care insurance
- Roll an employer–sponsored savings plan account over into another tax–advantaged plan
- Begin a college savings program
- Reevaluate your risk tolerance, and change the investment allocations on your retirement or other long–term savings plans to be more or less aggressive
- Begin to think about ways to cover any estate tax obligations your heirs may need to pay after your death
Prepare questions about these changes and discuss them with the appropriate professional.
- Review your life insurance plans carefully. Most people think about life insurance only as a way to protect the people who depend on them for financial support in the event they die prematurely. Although this is the primary purpose of life insurance, permanent life insurance can do a great deal more.
Conduct a careful and thorough review of your life insurance needs with your life insurance agent. Ask about the ways in which life insurance may be able to help you meet your long term goals. Find out too about the potential advantages of converting your term policies to whole life coverage.
- Review the performance of your retirement plan savings and investments. Many financial experts say you may need from 70 to 80 percent of your pre–retirement income to maintain your standard of living after you stop working. This figure has increased in recent years for a variety of reasons, including inflation, increasing life spans, better medical care, and changing expectations during retirement. Today's retirees have redefined retirement as an active time to explore new interests. No longer the end of work life, it's become a new beginning, often the start of a second career, world travel, continuing education, a new business, or volunteer work.
In addition, while some expenses typically decrease during retirement (such as commuting, mortgage, and financial responsibilities for children) others, such as health care, travel, hobbies, continuing education, or a second home, can actually increase.
Take a look at your total retirement income picture, including any defined benefit pension plans, employer–sponsored savings plans (401(k)/403(b)), CDs, annuities, and IRAs you may have.
Review each plan's annual statement. Be certain your retirement savings is growing at a rate that will support the retirement you're working so hard to earn. Talk to the appropriate professional about any performance issues and the possible need to rebalance your accounts to ensure that your investments are well aligned with your goals and well diversified to provide a cushion from downturns in specific areas of the market.
Review the performance of any stocks, bonds, and mutual funds you own. Once again, talk to the appropriate professional about any performance issues and discuss rebalancing your accounts to align with your goals and provides a cushion from market downturns as much as possible.
- Consider the impact taxes will have on your retirement savings and income goals. Tax laws change nearly every year: the ceilings on contributions to certain plans such as IRAs may increase, penalties for certain withdrawals may appear or disappear. Rules may be grandfathered; opportunities such as 529 plans* and other college savings plans, may emerge. Be certain you understand the tax changes that take place as well as those on the horizon, and be aware of the impact they are likely to have on your current income and your retirement and other long–term savings goals. Discuss these changes and their impact thoroughly with your accountant or tax advisor. Ask also about how you might be able to maximize your tax deferred savings through last–minute retirement plan contributions to your tax–advantaged accounts.(*Potential investors of 529 plans may get more favorable tax benefits from 529 plan sponsored by their state. Consult your tax advisor for how 529 tax treatment would apply to your particular situation. 529 plans are offered by properly Registered Representatives of NYLIFE Securities LLC Member FINRA, SIPC, A Licensed Insurance Agency, a subsidiary of New York Life Insurance Company.
- If you own a business, review all your insurance and retirement programs. Together with your insurance agent, review your business owners policy and group health, disability, retirement savings, and life insurance plans carefully to be certain that your business and your employees are adequately protected and that your policies continue to make economic sense for the business. Be certain also to review any buy–sell agreements, profit sharing plans, split dollar arrangements, and executive bonus plans. Again, as they are currently structured, do they make economic sense for the business? Are they protecting the business and enabling you to attract and retain top talent in your industry?
- Finally, be sure to find out about new policies, plans, and products that are available. Financial companies introduce new products and enhance their existing products each year. Ask the appropriate professional about new life insurance policies, retirement savings plans, and investment programs that have become or will shortly become available and how you can take maximum advantage of them. Be certain you're fully aware of all the benefits available through your employer and that you're getting maximum value out of your employer–sponsored plans such as 401(k) and 403(b).
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|Manage Your Finances for a New Year: An Annual Review|